Elasticity

Elasticity

• MEASURE OF RESPONSIVENESS OF QUANTITY DEMANDED OF A GOOD TO A CHANGE IN SOME VARIABLE
• 

Price Elasticity of Demand (PED)

• MEASURES PROPORTIONATE CHANGE IN QUANTITY DEMANDED FOR A GOOD CAUSED BY THE PROPORTIONATE CHANGE IN THE PRICE OF THE GOOD ITSELF
• FORMULA: TOTAL QUANTITY X PRICE 1 + PRICE 2
• TOTAL PRICE QUANTITY 1 + QUANTITY 2
• RESULT:
• > 1 = ELASTIC - PRICE INCREASE = DEMAND DECREASE - PRICE INCREASE = TOTAL REVENUE DECREASE
• < 1 = INELASTIC - P. INREASE = LITTLE CHANGE - P. INCREASE = TR INCREASE
• = 1 = UNITARY ELASTIC - P. INCREASE 10% = DEMAND DECREASE 10% - P. INCREACE = TR DECREASE
• O = PERFECTLY INELASTIC - P.INCREASE = NO CHANGE
• INFINITY = PERFECTLY ELASTIC - P. INCREASE = DEMAND -> O
• NEGATICE RESULT: OBEYS LAWS OF DEMAND
• POSITIVE RESULT: DOESN'T OBEY LAWS OF DEMAND, EG. GIFFEN GOOD

FACTORS AFFECTING PED

• 
• SUBSTITUTE GOODS - MORE SUBSTITUTES = GREATER ELASTICITY
• COMPLEMENTARY GOODS - CHEAPER OF GOODS =INELASTIC
• LUXURY GOODS = ELASTIC
• NECESSITIES = INELASTIC
• BRAND LOYALTY = INELATIC
• DURABILITY - PRICE INCREASES, EXTEND LIFE OF CURRENT MODEL = ELASTIC

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